California’s anti-SLAPP statute (Code of Civil Procedure section 425.16) aims to protect defendants from meritless lawsuits designed to chill “protected activity” — i.e., the exercise of rights of petition (litigation) or free speech on matters of public concern. Any defendant facing such a lawsuit can file a special motion to strike, and if the motion is granted the lawsuit will be dismissed.
The LLC Jungle addressed the anti-SLAPP statute in an earlier post: Diversion of LLC Funds Is Not “Protected Activity” Under California’s Anti-SLAPP Statute
In an opinion recently filed by California’s Second Appellate District — Blue Creek Capital, LLC v. Singh (copy not yet available) — the Court addressed another anti-SLAPP motion within the context of an LLC “authority” dispute. While the case is not published and therefore not precedential, it nonetheless provides a useful guidepost.
Facts: LLC member owning minority interest files lawsuit on behalf of the LLC without authority
Rakhi Singh and Nitesh Singh were 15% members of Blue Creek Capital, LLC. The LLC’s Operating Agreement stated that every company decision was to be made based on a majority vote of the members. The LLC’s primary asset was a 9.3 acre parcel in Los Altos, which was leased to an educational facility, Creative Learning Center (CLC).
The Singhs sued the LLC for various claims that were not at issue in the appeal. The LLC filed cross-claims against the Singhs alleging breach of fiduciary duty and declaratory relief, which were the focal point of the appeal.
The LLC’s claim for breach of fiduciary duty alleged that Rakhi Singh breached her fiduciary duty to the LLC and its members by failing to disclose material facts to the LLC and filing a lawsuit against the tenant CLC without authorization or the consent of the other members in violation of the Operating Agreement. Specifically, the claim alleged that Singh acted as the LLC’s primary contact with CLC regarding its lease, that Singh failed to disclose to the other members that CLC failed to make rent payments, and that Singh made certain heavy-handed and uncooperative demands on CLC that led to CLC terminating the lease, causing financial harm to the LLC. Singh also used the LLC’s funds to retain counsel and file a lawsuit against CLC on behalf of the company without any notice or consent from the LLC’s other members.
The LLC’s claim for declaratory relief asked the court to declare that the Singhs’ written notice of withdrawal from the LLC was effective.
The Singhs filed an anti-SLAPP motion attacking the LLC’s cross-claims. The motion argued that the LLC’s claims were “based on communications relating to judicial proceedings” and therefore subject to the ant-SLAPP statute.
Trial Court: anti-SLAPP motion denied
The trial court denied the Singhs’ anti-SLAPP motion.
The court ruled that the lawsuit against CLC (on which the LLC’s claim for breach of fiduciary duty was largely based) was not in furtherance of the Singhs’ right of petition, but rather “was filed on behalf of the Company, allegedly against its interests and in bad faith without proper authorization.”
The court likewise found that the claim for declaratory relief was not primarily based on protected communications, but rather, on a dispute as to whether the Singhs’ notice of withdrawal was effective.
The Singhs appealed.
Court of Appeal: affirmed; cross-claims were not based on protected activity
The Court of Appeal affirmed the trial court’s ruling.
The opinion recited that under the anti-SLAPP statute, “a claim may be struck only if the speech or petitioning activity itself is the wrong complained of, and not just evidence of liability[.]”
Here, the court held, the LLC’s claim for breach of fiduciary duty “is based on more than Rakhi Singh’s act of causing the CLC lawsuit to be filed on behalf of Blue Creek.” The claim alleged that “Ms. Singh failed to disclose to the other members of Blue Creek that CLC had failed to make rent payments; Ms. Singh unilaterally refused to negotiate with CLC and demanded that it pay late fees in addition to back rent, without authorization from Blue Creek; CLC terminated its lease due to Ms. Singh’s lack of cooperation … [and] Ms. Singh, again without authorization and in violation of the operating agreement, used Blue Creek’s funds to retain counsel and file a lawsuit against CLC on behalf of Blue Creek” without the consent of the other, majority members.
The court held, in short, that the “basis of Blue Creek’s cause of action is that Rakhi Singh’s interactions with Blue Creek’s lessee were without authorization, in violation of the operating agreement, and against Blue Creek’s interests.” The court further held: “The wrong that Blue Creek complains of is Ms. Singh’s allegedly unauthorized actions toward CLC which culminated in the CLC lawsuit. The lawsuit provides evidence of, and context for, Ms. Singh’s alleged breach of fiduciary duty and unauthorized conduct, but it is not an essential element of the cause of action.”
Likewise, the court held that the LLC’s claim for declaratory relief was aimed at “whether the Singhs’ notice of withdrawal was effective and, if so, how that impacts the Singhs’ status in Blue Creek and their obligations to Blue Creek.” The claim did not target any protected activity.
Lesson
Under the unpublished Blue Creek Capital opinion, a claim based on an LLC member’s filing of a lawsuit on behalf of the LLC without proper authority to do so is not based on activity protected by the anti-SLAPP statute. Likewise, a claim seeking declaratory relief as to whether a member’s notice of withdrawal is effective is also not based on protected activity.
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